1/29/2011 @ 11:40AM

In Egypt, Democracy Is The Only Avenue To Economic Stability

Egypt’s would-be revolution is causing not only a political earthquake, but an economic one as well. On Friday, the Dow Jones Industrial average was down 166 points–the biggest one-day drop in nearly half a year. Oil prices shot up more than 4%. Keith Wirtz, chief investment officer at Fifth Third Asset Management warned of a 5% to 10% selloff in the coming weeks.

Up until recently, Egypt was hailed as a success story by international financial institutions. In 2008, the World Bank’s Doing Business report named Egypt the world’s top reformer. The technocratic government of Prime Minister Ahmed Nazif oversaw annual GDP growth of 5% to 7%. By shutting out any opposition, the Egyptian regime promised political stability and delivered impressive growth. Uncertainty is the enemy of markets, and the Arab authoritarian order seemed, if nothing else, to offer a certain reliability. The past few days, that certainty has proven illusory. Egypt will not go back to what it was. In the coming weeks, the country’s economic situation will deteriorate further. On Thursday, the main index of the Egyptian stock market dropped 10.5%. Meanwhile, tourists are fleeing Egypt, and they’re not likely to come back anytime soon.

But this isn’t just about Egypt. This is about a regional architecture that is crumbling, and more rapidly than anyone had imagined. There have been unprecedented protests in Yemen and rejuvenated opposition in Jordan, another close U.S. ally and the second-largest per-capita recipient of American assistance. In other words, Tunisia and Egypt are part of a broader regional trend. If Egypt–considered to have a robust security apparatus–falls, then all bets are off elsewhere. Egyptians, after all, drew inspiration and energy from Tunisia’s “Jasmine Revolution.” Other countries will now draw inspiration from what has been the largest pro-democracy mobilization in the history of Egypt and perhaps the Arab world. It would be premature to predict a pan-Arab revolution. Revolutions, even in the best of times, are incredibly difficult to stage. But, for the first time, a region-wide movement toward democracy is within the realm of possibility.

The other regimes in question are important U.S. allies that have opened themselves up to Western business and investment, sometimes with impressive results. More important, with the world’s largest reserves, they play a critical role in ensuring the free flow of oil. Saudi Arabia figures most prominently in such calculations. Its stock market, the region’s largest, experienced a one-day drop of 6% in response to events in Egypt. And that was without any internal agitation. How much will it dip if Saudis start holding sit-ins?

Investors should be worried. And most of them already are. Accordingly, where the people have made clear their desire for change, the international community should do what it can to facilitate successful–and peaceful–democratic transitions. Tunisia, the country that provided the spark for the events of the past month, may very well still fall into chaos. Pro-democracy revolutions don’t necessarily lead to democracy. So the current phase of re-building the country’s political institutions is crucial. In a country like Egypt, full-scale violence initiated by a fragile regime would undermine the little stability that remains. It may be the case that many in the business community, along with the Obama administration, would prefer to see the Egyptian regime remain in power, but under better behavior. This, however, does not seem to be a path the Egyptian people, led by a diverse and peaceful protest movement, are willing to take.

Democracy–with the accountability, popular legitimacy and peaceful resolution of conflict it so often brings–is the only avenue to long-term stability. Otherwise, authoritarian regimes will appear stable–until they’re not. And, by then, it’s too late.

Shadi Hamid is director of research at the Brookings Doha Center and a fellow at the Saban Center for Middle East Policy at the Brookings Institution.